Strategie tradingu pro ochranu akciové pozice proti poklesu ceny s využitím opčních kontraktů.
There’s probably no reason not to share this technique with a broader audience. It certainly won’t hurt if you beat the big players more often, those who are playing against you and trying to take your money from the market. If you’re currently only investing in naked stocks, keep reading - you’ll have the opportunity to enrich your trading with additional techniques.
1. The Principle of the Technique
The technique I’m about to describe secures purchased stocks against a price drop. Initially, we want the underlying asset’s price to rise. In case it drops, we secure the certainty of selling it at the purchase price by a certain date in the future. The insurance for this possibility isn’t free; in other words, we are guaranteed to sell the stock at the purchase price, but we risk the cost of the insurance. However, we don’t stop there. The amount paid for the price drop insurance of the purchased stocks can be reduced by writing options on both the put and call sides. This entire combination can then be further cost-optimized depending on the subsequent movement of the underlying asset. It’s possible to achieve zero cost for securing against a price drop or even generate a small credit. This situation is fantastic, especially from an emotional calmness perspective. Imagine buying a position for $15,000, securing it at no cost, and being able to sleep peacefully without fear that the market will move against you.
2. Selection of stocks
The technique we’ll describe has certain specifics; in other words, the options and stocks that I want to trade using this method must meet certain conditions.
This technique makes sense to use with more expensive or more volatile stocks.
Each person must determine their own price threshold based on the level of risk they’re willing to take. If a stock priced at, say, $50 drops by 50%, it won’t hurt as much as if TSLA drops from $400 to $100. Such an unhedged position could cause considerable anxiety. At the same time, more expensive stocks tend to have option premiums that are more suitable for this technique.
The premium of the underlying stock’s options must decrease slowly as the strike price moves further away from the current stock price.
What does that mean? Let’s use an example. The price of ATM (at the money) put options for META, with an expiration of 40 days, is currently around $900—this is the cost of our insurance against a drop in META stock over 40 days. A put option with a strike about $25 below the current stock price costs around $230. While it’s possible to find a slower rate of premium decrease between strikes, this example is still workable. The technique cannot be used if the premium for a more distant stock price, which could still reasonably be reached within 40 days, is, for example, only $35.
3. The Logic Behind Position Construction
Constructing the entire position involves mathematics, the level of risk you’re willing to take, the phase of the market cycle we’re in, the level of implied volatility, and several other factors.
Before opening such a position, I want to see that the implied volatility of the stock is at medium to high levels. This indicates that the option premiums will also be higher, and it also means that a drop in volatility alone might be enough to generate profit. Additionally, I want the premium at the strike price where I estimate the maximum possible pullback from the current price to be around 30% of the ATM option price. The estimate of the maximum likely drop is derived from the chart. This requires some experience and performing a basic technical analysis to predict the stock’s next move, the upcoming swing in the trend channel, symmetry from the trendline break, etc.
Finally, I check what fundamental events might occur before the option’s expiration on that stock and the market. I choose the expiration based on the premium level and again according to the chart. I most often select an expiration around one month out. With shorter expirations, the premiums on distant strikes are usually lower, and the calculations no longer meet my criteria. The most important fundamentals are the company’s earnings report and the Fed’s meetings and statements. Other macro indicators, such as consumer price developments or unemployment, can move the market, but there are usually so many of these during the position’s life that it doesn’t make much sense to speculate on or worry about any particular one.
4. Opening the Position
The foundation is buying the stock. Since one option represents 100 shares, we purchase 100 shares or multiples of 100. This is a cost item.
Next, we buy an ATM PUT option. This is our insurance that, at the latest on the expiration date, we can sell the shares at a price close to our purchase price. Again, this is a cost debit operation.
At a more distant strike, we write (sell) a PUT option. This is a credit operation, and with this step, we reduce the cost of our insurance.
Now, we have the shares purchased, the insurance for, say, $900, and for the written option, we receive $230. The balance is -$670.
And now we perform an operation we haven’t yet discussed:
We write a CALL option on the opposite side of the option chain. We look for a strike where the premium is close to the value of our balance, around $670. Before executing this, we need to do some calculations, considering probabilities, experience, and the state of the chart. Let’s say our strike is ten dollars above the current price. In this case, it means that if the underlying price ends up at or above this price at expiration, the entire position, including the stock, will be liquidated, and we’ll take a profit of $1,000. Why? Because our option positions were cost-neutral, and 100 shares x $10 upward movement equals $1,000 in profit.
When selecting strikes for writing the PUT and CALL options, we have various options, of course. The position doesn’t have to be cost-neutral. For example, if we move the CALL option strike another fifteen dollars higher, it means we would collect a lower premium, say by $300, leaving us at -$300 on the option positions. But if the price reaches the value of our written CALL option, we would collect $25 x 100 shares, making the balance +$2,200. This is, of course, more than in the first scenario, but we risk losing $300 if the stock price doesn’t move by expiration. In a neutral position, only a $3 upward move in the underlying price is needed to break even.
The image illustrates the selection of options for the described strategy. In the middle, you can see the strike prices (underlying price, in our case META stock). The central horizontal dividing line marks the current price, with PUT options on the right and CALL options on the left. ‘B’ (buy) and the green row indicate the purchase of an option (insurance), while ‘S’ (sell) and the red row indicate the writing or selling of an option. From the option prices in the bid and ask columns, we can calculate that the balance of this structure is approximately -$280. To this, we must add the difference between the purchase price and the insurance strike: 187 (current price) - 185 x 100 = $200. The total balance of the position at opening is -$480. In this case, I would want to see most of the assumptions for a high probability that META will move upwards within 40 days. If it moves above the price of 205, our profit would be capped at 205 - 187 x 100 = $1,800 - costs of $480 = $1,320.
However, we could choose a CALL option at the 195 strike, where the premium is higher. In this case, we would achieve a cost-neutral position on the options. If the price drops and the position closes at a price above the written option of 160, we would lose $200 from the difference between the insurance strike and the purchase price. In the event of an upward move, the profit would be limited to the difference between the purchase price and the 195 strike, i.e., 195 - 187 x 100 = $800 if META’s price reaches 195 or higher.
5. Closing the position
If I hold the position for about a month and earnings are approaching along with the options’ expiration, and the position is in profit, I close the position before the earnings announcement and take the profit. This is because, if the price were to drop after poor earnings, there would be little time for it to recover.
On the other hand, if I see signals and news on the market indicating good earnings, or if the price is very attractive and a drop wouldn’t bother me for buying the stock, I open a position even right before earnings when volatility is highest and, consequently, the option premiums are high. This is what I did with AAPL this week, and I closed the position in 3 days with a profit of over $800.
6. Risks / Disadvantages of This Strategy
This strategy is more capital-intensive. It’s important to remember that we’re buying at least 100 shares at a price of $100 or more. While the purchased put option reduces the margin requirement, the written option increases it again, so the position remains more demanding compared to using just options or a similar structure with futures contracts instead of stocks.
This strategy, in its described form, profits when the underlying moves upward. It protects against a price drop but with some limitations. The limitation is the price level of the underlying at the strike where the put option is written. If, at expiration, the underlying price falls below the strike of our written put option, the option would be in the money (ITM) at expiration, meaning it would be exercised, and we would end up with 100 shares of the underlying stock at the strike price where the option was written. I should note that the purchased insurance option would also be ITM in this scenario and would automatically handle the sale of our original shares at or near the purchase price (our purchase might have been at $172, but strikes for this stock might be at 165, 170, 175).
The entire structure, therefore, ensures that in the event of a price drop below the strike of the written put option, our shares are exchanged for a lower entry price. The difference in purchase prices would then be credited as cash to our broker account after expiration.
Now, logically, the question arises: what do we do in such a situation? We have 100 shares, albeit at a lower price, but again unprotected against further price drops. The solution depends on the specific price level of the underlying after expiration. If the price is very close to our new entry price, we could likely rebuild a similar structure as described earlier. If the current price is another ten, fifteen, or more dollars below our new purchase price, we wouldn’t be able to create a cost-neutral options position, because the insurance option would be deep ITM, making it very expensive, while the put option slightly below the current price would be far OTM and therefore have a low premium. The balance of the two options would be highly negative, and even writing a call option wouldn’t help in this case. We would have to write a call option below our new purchase price to obtain a high enough premium to offset the negative balance on the put side, but this risks that if the underlying price rises above the strike of this call option, the shares will be sold below our purchase price, resulting in a loss.
Managing a situation where the underlying price continues to fall below the strike of the written put option isn’t simple, and it requires attention and adjustments during the move below the written option. In such an unfavorable scenario, we can adjust the written call option toward the strike price of the shares, where the premium will be higher than at the initial writing of the call option, thereby bringing additional credit into the position’s overall economics. This credit would then be factored into the new average purchase price of the shares, effectively lowering the break-even price for the new position.
Another solution might be to liquidate the entire position before expiration, closing out with a controlled loss if the price isn’t moving as anticipated. For example, if the chart breaks a significant support level, etc.
We always work with probabilities, so it’s crucial to open such positions when the probability of an upward move in the underlying price is higher than the probability of a drop.
If you want to learn more about our options strategies, you can follow all our trading orders in the members’ section or learn our options strategies in the online course. Stay tuned to our website for more information.
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